NAGASAKI, Japan: Once seen as a model for consolidation, the merger of two regional banks in Nagasaki may expose flaws in Prime Minister Yoshihide Suga’s plan to revitalise regional economies by creating stronger lenders.
In Nagasaki’s distant past, the city was a stronghold of trade and finance. These days, Japan’s larger ports soak up all the business, and local banks, crippled by a stagnant economy and shrinking customer base, scrap for profits.
That made the Oct. 1 merger of Eighteenth Bank and Shinwa Bank a potential test case for turning around the city’s fortunes. The new institution, formed after a lengthy battle between the antitrust watchdog and financial regulators, has a roughly 70% share in the southern Japanese prefecture.
The merger has the blessing of Suga, who has emphasised the need for regional banks to consolidate to survive dwindling local economies and years of ultra-low interest rates. Japan’s banking regulator has held up the deal as a model for streamlining an overcrowded regional banking sector.
But the community isn’t rejoicing.
Some in Nagasaki fret the merged bank, which would belong to a financial group based in Fukuoka prefecture, may shift its focus away from local borrowers.
“I’m worried the new bank may pay less attention to Nagasaki,” said Ryuji Kuon, owner of a boat tour firm. “There’s no clear explanation on how the merger would help us.”
There is also concern a lack of competition would give the new bank, Juhachi-Shinwa, the power to impose higher rates or unfavourable conditions on small borrowers.
“In running a business, it’s always good to get advice from multiple banks,” said Tadayuki Yasui, owner of a pizza shop. “We won’t have that opportunity anymore.”
Juhachi-Shinwa says it will ensure there is no disadvantage to borrowers, and will create a third-party committee that monitors its lending practices.
But such concerns were big enough to alarm Japan’s antitrust watchdog, causing a multiyear delay in the merger.
They also highlight the challenges Suga faces in creating stronger banks without marginalising small businesses.
“Mergers between regional banks operating in the same prefecture, such as what happened in Nagasaki, may lead to branch closures and job losses that won’t go down well with the local community,” said Satoru Kado, an analyst at Mitsubishi UFJ Research and Consulting.
“Without cost cuts, however, it would be hard for many regional banks to survive, as it’s become so hard to make money out of traditional lending businesses,” Kado added.
Regulators have long prodded regional banks to consolidate, as their combined net profits tumbled 40% in the last four years. Data show that more than 100 lenders scattered across 47 prefectures compete for lending margins that have sunk to a meagre 0.2%.
Seeking to avoid delays in the next merger, the government laid the groundwork for a smoother consolidation in May by exempting regional bank consolidations from antitrust rules.
Policymakers say orderly mergers are crucial, as the coronavirus-stricken economy could lead to piles of bad loans.
But regional banks have been slow to respond, as differences in corporate culture make many of their executives cautious of mergers.
And revitalising a prefecture like Nagasaki – an exemplar of other suffering local economies – won’t be easy even with bigger banks.
As Japan’s few gateways to the world during its two-century national isolation, Nagasaki thrived as a cosmopolitan financial hub. Until about a decade ago, it flourished as home to shipbuilding plants owned by Mitsubishi Heavy Industries. But the company began losing market share to its South Korean and Chinese rivals.
The prefecture’s population shrank 1.12% in 2019, the eighth-fastest pace in Japan, as the younger generation moved to bigger cities in search of better jobs. Nagasaki’s tourism industry evaporated amid the pandemic.
Tomoyuki Ushijima, executive officer of Juhachi-Shinwa, says the merger can help revitalise Nagasaki. But he added that borrowers must also get their acts together.
“The only way to survive in an economy with a shrinking population is to boost productivity,” he said. “Given the huge challenges ahead, we, banks, decided to merge. Borrowers may need to consider doing so too.”
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